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Under the income tax laws of the United States, sums received by a nonresident alien author not engaged in trade or business within the United States and not having an office or place of business are required to be included in his gross income for federal tax purposes. Such receipts are an appropriate and readily collectible subject of taxation.
Respondent Pelham G. Wodehouse, a nonresident alien not engaged in trade or business within the United States and not having an office or place of business therein, received in 1938 and 1941 from magazine and book publishers in the United States lump sum payments, in advance and in full, for the American serial and book rights to certain literary works of which he was the author and which were ready to be copyrighted. In 1944, petitioner, the Commissioner of Internal Revenue, gave the respondent notice of tax deficiencies assessed against him for the taxable years 1923, 1924, 1938, 1940 and 1941. In these assessments, among other items, the Commissioner claimed deficiencies in the respondent's income tax payments based upon his 1938 and 1941 receipts. In a petition to the Tax Court, the respondent contested the additional taxes assessed against him and asked for refund of the amounts which had been withheld, for income tax purposes, from each such payment. The Tax Court entered judgment against respondent. The appellate court reversed the decision of the Tax Court. Certiorari was granted.
Did the respondent owe tax on sums received by him for the sale of serial rights to novels?
The U.S. Supreme Court reversed an order that held that respondent taxpayer, a nonresident alien author not engaged in trade or business within the United States and not having an office therein, owed no tax on sums received by him for the sale of serial rights to novels. The Court ruled in favor of petitioner Internal Revenue Service commissioner that such sums constituted gross income from sources within the U.S. because they were royalties for the use of copyrights or other like property, regardless of whether they were paid in a lump sum or periodically. Respondent was a British subject living in France who received the payments from U.S. companies. 26 U.S.C.S. § 211 imposed a tax on 10 percent of the income received by a nonresident alien not engaged in trade or business within the country and not having an office or place of business therein, and 26 U.S.C.S. § 212(a) provided that such gross income included only gross income from sources within the U.S. 26 U.S.C.S. § 119(a)(4) defined gross income to include royalties for the use of or for the privilege of using in the U.S. copyrights or other like property. Lump sum payments for serial rights were royalties subject to taxation.